3.4.4 Oligopoly Flashcards
oligopoly, characteristics, game theory, etc.
what are the characteristics of an oligopoly?
- few dominant firms
- interdependence
- significant barriers to entry e.g. high capital requirements, EoS, brand loyalty
- non-price competition e.g. advertising, improving quality, customer services
examples of oligopolistic markets
- pharmaceutical companies
- airlines
- fizzy drinks companies
what is market concentration + how is it measured?
- the level of domination
- measured using a concenration ratio
market concentration ratio formula
(S1 + S2 + Sn…)/total industry sales x100
what are the reasons for collusive behaviour?
- firms have similar costs
- relatively few firms in the market
- brand loyalty = where customers are less likely to buy from a diff. firm even if their prices are lower
- relatively high barriers to entry
reasons for competitive behaviour
- one firm has lower costs than the other
- relatively large no. of firms in the market -> harder to be observant of everyone in the market
- firms produce very similar products
- low barriers to entry
example of a cartel and how do they usually operate
- OPEC (organisation of the petroleum exporting countries)
- firms agree to limit output to raise prices
- regular meetings held
conditions of a successful cartel
- cheating must be prevented
- potential competition must be restricted
- agreement must be reached
aims of price fixing
- boosts profits for all involved
- more stable and predictable market -> keeps new entrants out -> lower competition -> able to raise prices -> joint profit maximisation
what is meant by tacit/informal collusion and how is it characterised?
- firms do not explicitly agree to collude -> monitor each other’s behaviour and observe price changes
- price leader (dominant firm) and price follower (smaller firms within the market)
what is meant by dominant strategy
where a single strategy is best for the player regardless of what strategy the other player chooses
nash equilibrium definition
where all participants are pursuing their dominant strategies
counterarguments of game theory assumptions
- difficult to know what the payoffs will be
- assumes rational behaviour - one could be risk-averse/risk-taking
what is the difference between predatory pricing and limit pricing?
PREDATORY PRICING:
- firms will set their prices below AVC -> temporarily make losses in the SR -> smaller firms struggle to compete -> leave the market -> firms rise prices back up -> abnormal profits up for bigger firm
LIMIT PRICING:
- firms will lower prices (above AVC) so no losses made but low enough to deter new entrants from coming into the market -> reduced contestability
what happens in a price war
repeated cutting of prices below competitors -> drives prices down -> firms makr losses frequently -> SR firms will stay in the market because they are covering their variable costs
do consumers always gain from price wars
- theoretically hell yes -> prices down -> more competitive deals to consumers -> consumer surplus uppity up
- HOWEVER, oligopolists engage in predatory pricing -> prices will increase once competition is eliminated -> reduces choice
- price wars can lead to quality, innovation and variety being sacrificed
examples of non price competition
- advertising and branding -> consumer loyalty up
- consumer loyalty schemes e.g. Clubcard
- improving customer service
advantages of oligopoly
- price wars -> lower price -> higher consumer surplus
- high SNP -> more corporate tax revenue -> used for public service funding
- dominant firms -> more able to exploit EoS -> lower AC -> lower prices in the LR
- constant competitive methods -> high levels of R&D -> improve dynamic efficiency
disadvantages against oligopoly
- high concentration ratio -> limited consumer choice
- tax avoidance -> less corporate tax revenue -> less government funds
EVAL -> CMA can investigate cartels and protect consumers
